The Impact of Cognitive and Emotional Biases on Individual Investor’s Investment Decision: Mediating Role of Risk Perception

Abstract

This study aims to clarify the mechanisms by which cognitive and emotional biases influence the investment choices of retail investors who trade on the Pakistan Stock Exchange (PSX), in addition to mediation of risk perception.  The behavior of retail investors in the least developing or emerging financial markets is not generally recognized, with most studies concentrating on well-developed financial markets. Utilizing a sample of 385 traders who are investors in the PSX, data was gathered through a purposive sampling technique. The descriptive analysis was conducted using IBM SPSS 27, while the measurement model and SEM assessments were conducted through SmartPLS 4.1.0.3. The findings reveal that biases, including representativeness bias (? = -0.185, p < .05), availability bias (? = -0.223, p < .000), and regret aversion bias (? = -0.494, p < .000), negatively affect investment choices made by retail investors on the PSX, with risk perception (? = 0.302, p < .000) mediating these relationships. This study, recommended for stock exchange investors and policymakers in collectivist cultures and least developed markets, provides original insights into the mediating role of risk perception, a context often overlooked in research focused on developed markets.